Card Issuers Punish Tardy Payers With Fees
Credit card companies are starting to make sloppy users pay dearly for their mistakes.
After years of leniency for fear of losing customers, banks and other card issuers are now driven by a different motive: thirst for fee income. They are boosting rates for tardy payers and raising penalty fees for spenders who exceed credit limits.
Credit card experts and cardholder groups are critical of the new fees, saying they are exorbitant. They accuse issuers of seducing customers with offers of low rates and burying the charges in fine print.
Cardholders can end up with an annual percentage rate twice as high as the one they signed up for. On top of that, they have to pay multiple penalty fees if they pay late or surpass their limit a few times.
“If a person is chronically late, that should be penalized, but based on what we’ve seen, a lot of the time the punishments don’t fit the crime,” said Ruth Susswein, executive director of Bankcard Holders of America in McLean, Va.
Issuers counter that the fees offset higher costs associated with servicing negligent customers and encourage people to clean up their act.
Citibank and AT&T;, the nation’s two largest credit card issuers, are cracking down on cardholders who break the rules. Citibank, with 34 million cardholders, in April began raising rates for some late payers to 12.9% plus the prime bank rate, up from its standard rate of prime plus 9.4%.
In September, AT&T;, with 23 million cards, will raise rates for tardy payers to 11.9% plus the prime rate.
The company is also raising fees for exceeding charge limits or bouncing a payment check to $15 from $10. AT&T; raised late payment fees to $15 from $10 earlier this year.
Other big card issuers are following. In September, Chase Manhattan Bank, the nation’s fifth-largest card company with 13 million cardholders, will start levying a $15 monthly charge against customers when their balance goes $100, or 5%, over their limit. Previously the bank did not charge an over-limit fee.
Customers are notified of the changes in their statements and through special notices. Issuers say the charges are necessary because their costs rise when they must send reminders or carry charges for late payers.
They also say it is more fair to customers who play by the rules of their cardholder agreements.
But credit card experts say there is another reason for the punishments. Competition has forced many card issuers to offer lower rates and waive annual fees, which has hurt profits. Now they are trying to make up for it through “risk-based pricing,” industry parlance for penalty fees.
“Fees have become much more important,” said Bob McKinley, president at RAM Research Corp., a Frederick, Md.-based firm that tracks the credit card industry. Average rates have fallen from about 21% a few years ago to about 18.3% now, according to RAM Research.
Issuers say they are careful about fining people with good payment histories, and say that if they penalize cardholders by raising the APR, they will change the rates back within a year if cardholders pay on time.
But some issuers are penalizing customers whom they consider higher credit risks, even if they have not missed a payment. Capital One Financial Corp., a Falls Church, Va., issuer spun off by Signet Banking Corp., examines cardholders’ credit records and will change their rates if customers carry a lot of debt or have a history of late payments on other cards or loans.
